Planning For the Future with a Special Needs Child
– in Three Parts
Part 1 - The Child’s Long-Term Needs
Part 2 - The Parents Long-Term Needs
Part 3 - The Balancing Act
Planning For the Future with a Special Needs Child - Part 1
The Child’s Long-Term NeedsBy Harry S. Margolis and Eric Prichard
As if the job of being a caregiver for a special needs child is not difficult enough on its own, Baby Boomers often find themselves becoming dual caregivers for both their children and their own aging parents. They may have to provide constant care and attention to their children even after they reach adulthood; while their parents are probably facing their own set of challenges as they grow older. At a certain point, the caregiver will likely have to assist their parent with the same set of issues that they have to face with their child with special needs, namely how to pay for essential services while securing medical care and affordable housing, and simply providing the love and attention they need. This dual caregiver relationship is never easy, but for parents of children with special needs, planning for their own long-term elder care is essential because very often the special needs child will be unable to provide the necessary assistance.
Planning for your own long-term care when you have a child with special needs requires a delicate balancing act between establishing your own financial position to ensure a comfortable retirement and making sure that your child’s needs are protected, both while you are alive and after you are gone. Most parents of children with special needs will immediately think of what they should do to protect their children’s future before concentrating on their own needs. However, there are ways for parents to accomplish both goals at once, through careful estate and special needs planning. By working with a well-qualified attorney and financial planner who specialize in helping families with special needs, a caregiver can establish a child’s security for life, while making sure that she will be well cared for when the parent needs his own cane to lean on further down the road.
In this first part of this series, we explore the tools available to parents of special needs children to provide for the long-term medical care, housing, and financial assistance the children will require In the two parts to follow, we will explore the tools available to parents looking to secure their own long-term needs into and beyond retirement, and finally take a look at how to balance these long-term needs of parent and child throughout their lives.
Over the course of her lifetime, the person with special needs requires a host of services, including medical care, housing, job training, and financial assistance. Various government programs can provide a broad spectrum of services designed to aid an individual with special needs. These programs range from very comprehensive (like Medicaid and Medicare) to very specific (like computer training and specialized housing), but most have one thing in common — the beneficiary must fall below some predetermined income or asset level, or both. Fortunately, planners have developed a very important instrument that can hold funds for a child’s future needs while allowing them to qualify for many types of public benefits. These tools are called “supplemental” or “special” needs trusts because they are designed to “supplement” any benefits a person with special needs may receive from the government.
Supplemental needs trusts are one of the most important parts of a parent’s estate plan because they allow maximum flexibility to manage a child’s care during every stage of her development. Typically, when you think of leaving an inheritance, you picture a dusty law office, the opening of a cracked will, and bingo - everyone gets their share. For parents of children with special needs, however, it is imperative that the share meant for the child with a disability flow directly into a supplemental needs trust in order to protect the child’s benefits. A qualified attorney can correctly set up your will to accomplish this.
Provided the trusts contain the appropriate language, funds from a retirement plan or life insurance policy, not just from a parent’s probate estate, can flow directly into the trust when a parent passes away, avoiding a potential loss of benefits should the child receive the money outright. Furthermore, trusts allow parents to make their intentions and caregiving goals clear. While a trustee must have independent discretion to distribute the funds to or for the benefit of the person with special needs, the trust can outline the child’s needs, the parent’s wishes, and can even include a special group of family friends and relatives called trust advisors who consult with the trustee on matters related to the beneficiary’s care. In other words, trusts are incredibly flexible and must be included in any responsible estate plan.
There are two main types of supplemental needs trusts.
The first, called a third-party trust, can be set up by any family member for the benefit of the person with special needs. Funds contributed to this trust are used to pay for additional care and services for a beneficiary, and are not considered the beneficiary’s assets for purposes of determining eligibility for government benefits. Theoretically, a parent or grandparent could deposit millions of dollars into a third-party supplemental needs trust and their child or grandchild would still qualify for benefits if necessary (although in this case, using the funds to provide superior private health insurance or housing may be a better idea).
The second type of trust is called a first-party or (d)(4)(A) trust. The key difference between a first-party trust and a third-party trust is that the former is designed to hold a beneficiary’s own assets, not funds donated by others. Even though the trust is designed to hold the beneficiary’s own funds, due to a quirk in federal law, the trust must be created by a parent, grandparent, or a court - the beneficiary cannot do it. These trusts are typically used when someone with special needs receives a large accident settlement or inheritance in her own name, or when someone who had been healthy and working becomes disabled through an injury or illness. While depositing funds into a first-party trust will allow a person to qualify for government benefits, the trust must provide that if any money remains in the trust when the beneficiary dies, it must first be used to reimburse the state for Medicaid paid out on the beneficiary’s behalf. If funds remain after such reimbursement, they can then go to other family members. Because of this provision, parents or other relatives of a person with special needs should never leave money directly to a beneficiary - they should establish their own third-party trust to hold the funds, avoiding the payback provision.
So which type of trust is the right one to set up? Both, actually. The third-party trust is important because you can place funds into it while alive, and through your will, life insurance policies and retirement accounts when you pass away, and the funds can be used without fear of government reimbursement. As for a first-party trust, since only a parent, grandparent or court can create it, we recommend creating one at the same time as the rest of your estate plan. Doing this ensures that the trust is available if or when your child comes into his own funds and needs to shelter them in the trust.
A variation on the first-party trust is a pooled disability or (d)(4)(C) trust. Like the first-party or (d)(4)(A) trust, this trust is to be funded with the beneficiary’s own funds, which fall under a special safe-harbor in the law that permits their creation and management by non-profit associations for any number of beneficiaries. Unlike the (d)(4)(A) trust, a disabled beneficiary herself can fund such a trust without the participation of a parent, grandparent, guardian or court. This can be very useful when there is no appropriate trustee to manage funds for a disabled beneficiary.
http://www.caregiver.com/articles/children/planning_for_special_needs_children_prt1.htm
Planning For the Future with a Special Needs Child - Part 2
The Parents' Long-Term NeedsBy Harry S. Margolis and Eric Prichard
In the first part of this series, we explored the tools available to parents of special needs children to provide for the long-term medical care, housing, and financial assistance the children will require. In this part we explore the tools available to parents looking to provide for their own long-term needs into and beyond retirement.
Looking at Your Own Long-Term Care
Careful planning of your own long-term care needs does two things. First, it protects you when you need help. Second, it allows valuable assets to flow to your child who needs them, instead of being squandered on your long-term care that could be paid for either through government programs or private insurance.
Before we go any further, there is one very important word of warning that any middle-aged or younger caregiver needs to hear. Many Medicaid planning strategies designed for seniors, like transferring a home into trust or spending down and preventively transferring assets out of one's name, are not appropriate for caregivers in their younger years. Your key goal will probably be flexibility, since you have many years ahead of you and will probably need access to most of your assets in order to care for your family.
Unfortunately, at some point, you may no longer be able to manage your own affairs or health care. Therefore, a key first step in your own estate plan, other than a traditional will and necessary trusts, should always be the durable power of attorney and health care proxy. A durable power of attorney gives someone the authority to make financial and basic caregiving decisions on your behalf, and a health care proxy allows someone to make your health care decisions should you become incapable of making them on your own. Together, these two instruments should be enough to prevent someone from having to obtain guardianship in order to assist you with basic activities and financial management. (If your child with special needs is capable of making his own decisions, he can create the same documents once he turns 18.)
You should think carefully about who receives these very important responsibilities, keeping in mind that people your own age, like siblings, will probably have similar impairments along the way. If you have children without special needs, they may be a good fit; but in any case, pick someone who knows your wishes and is capable of making difficult decisions on your behalf. Finally, since durable powers of attorney usually provide almost unlimited power to transfer and manipulate your assets, it is important that your agent understands your child with special needs' circumstances and is aware of how to spend your money on her behalf, if necessary.
Is Long-Term Care Insurance an Option?
Another key part of your own estate planning will probably involve at least looking into long-term care insurance. Having long-term care insurance can ensure that your care will be provided should you need it and allows you to conserve many of your assets for your child's care, instead of having to spend them down qualifying for Medicaid. While these policies developed a bad rap when first introduced (that is why many parents of caregivers don't have them now), the insurance industry has responded to greater consumer demand by offering much better products at lower rates than ever before.
When should a parent of a child with special needs look into purchasing long-term care insurance? As you probably know, the younger you are when you purchase the policy, the lower the premium. But parents in their 30s and 40s are probably too young to contribute to a policy they probably will not need for more than 30 years. Most planners recommend looking into long-term care insurance in your 50s or 60s, but parents of children with special needs will probably want to begin the process closer to age 50 than 60.
Long-term care insurance policies run the gamut in terms of coverage options. How much insurance is too much? A good rule of thumb is to research the daily cost of skilled nursing care in your area. Subtract your daily income from this cost to arrive at the correct amount of coverage. For example, if nursing home care in your city costs $300 a day, and your anticipated retirement income is $200 a day, you will probably need a policy that provides a daily benefit of $100 of care a day to make up for the shortfall. Policies also offer different periods of coverage, anywhere from two years up to your entire lifetime. Again, most people requiring long-term care don't require more than five years of care—usually a good amount of coverage for an average person.
Finally, unless you are over 70 years old when you purchase the policy, it is almost always advisable to include an inflation rider with the policy. While you may need only $100 a day of coverage today, you're likely to need much more in 30 years.
The final part of this series will explore the best ways to deploy these instruments, which parents have at their disposal to balance their own long-term needs with those of their special needs child throughout their lives.http://www.caregiver.com/articles/children/planning_for_special_needs_children_prt2.htm
Planning For the Future with a Special Needs Child - Part 3
The Balancing ActBy Harry S. Margolis and Eric Prichard
In the preceding two parts to this series, we explored the tools available to parents of special needs children to provide for the long-term medical care, housing, and financial assistance the children will require as well as the tools available to parents looking to provide for their own long-term needs into and beyond retirement. With this tool bag at their disposal, parents now need to decide how to balance these long-term needs throughout their lives.
Plan for Yourself, as Well as Your Child
Even though many caregivers who spend their entire lives taking care of others do often neglect themselves and their own care to the point where they reach old age and have nothing left to spend, having a child with special needs does not mean that you have to sacrifice your own future care. By planning now, before you need long-term care, and integrating your long-term care plan with your child's special needs planning, you will be able to guarantee your child's future comfort while resting assured that you will be taken care of with the same love and affection you give to your child.
Funding Your Child's Future
A trust functions much like a box—you can dress it up with a lot of bells and whistles, but when it comes down to it, its real job is to hold funds for your child's benefit. A trust without funds is merely an empty box. Having taken the first steps of creating the proper planning instruments (and looking into your own care in the process), the next step is using these new tools in the best possible way.
There is no generic dollar value every family should contribute to a trust. Instead, you should meet with a financial planner who specializes in planning for families with special needs children to work out a plan for the future. These plans first focus on the child's potential needs for the rest of his life in areas like housing, medical expenses, transportation, caregiver expenses and education. Once you determine what your child might possibly need, planners assign a dollar value to those expenses. By factoring in your child's projected income and life expectancy, planners then come up with a ballpark suggestion for funding the trust.
When families lack the assets necessary to fully fund a supplemental needs trust, life insurance can be a great way to guarantee a child's future without having to sacrifice a lot of income. With proper planning, policies can be structured to flow into your child's supplemental needs trust after you are gone, guaranteeing full trust funding. There are several kinds of life insurance products available for people looking to fund a trust: whole life insurance, which builds up value as you contribute premiums over the years; term life insurance, which provides coverage for a certain period of years with an option to extend the policy when the term runs out; universal life insurance, which provides the ability to adjust premiums and benefits over time; and survivorship insurance, which is a policy on two people (typically spouses) and pays out only on the death of the second to die.
Many planners recommend using survivorship insurance to fund a supplemental needs trust because of the lower premiums, flexibility in choosing whole or universal plans, and potential tax benefits. However, using survivorship insurance can sometimes backfire after one spouse dies and the second spouse discontinues the policy because she cannot afford to make the premium payments on a reduced income. If this could be problem for your family, term insurance provides a suitable alternative, offering the guarantee that the trust will be funded should you pass away during the policy term.
Pre-funding the Trust
While most estate planning, whether for a child with special needs or for anyone else, anticipates that the plan will be funded when the parents die, pre-funding a trust for a child with special needs can help ensure that the funds will be there. This is especially true if the parents feel they cannot afford to purchase long-term care insurance or are turned down for insurance due to their own physical condition. By transferring funds or a life insurance policy into an irrevocable supplemental needs trust, the parents give up ownership, meaning that the property in the trust need not be spent down for the parents to qualify for Medicaid should they require nursing home care. The only caveat here is that the trust must be funded at least five years before any application for Medicaid. While this pre-funded trust is the ideal course to provide the most flexibility to the beneficiary and future trustees because it allows other children and grandchildren may be beneficiaries in addition to the child with special needs, there is a more aggressive option available, though it is rarely recommended by qualified planners.
A pre-funded supplemental needs trust does not have such a requirement and can hold funds for a child's future needs while allowing them to qualify for many types of public benefits.
When All Else Fails
If a parent needs Medicaid coverage, he can transfer funds into a trust “solely for the benefit” of the child with special needs on the eve of applying for benefits. This provides very little flexibility, and many states require a “sole benefit” trust to name the state as ultimate beneficiary.
As mentioned, it is rarely recommended; but should you avoid taking any long-term care planning steps now and find yourself in immediate need of care (which can sometimes happen after a catastrophic accident or unforeseen illness), there is one way to immediately spend down your assets in order to qualify for Medicaid coverage of long-term care. The government allows a Medicaid applicant to transfer assets, without penalty, into a trust set up solely for the benefit of a person who suffers from a disability. If you find yourself in this situation, you can give away the majority of your assets, qualify for Medicaid, and rest assured that those funds will be used appropriately for your child's care as they grow older.
This vehicle can also provide a planning opportunity if a grandparent of a child with special needs requires long-term nursing care. He can also transfer funds into a trust solely for the benefit of the grandchild and qualify for Medicaid to cover his care. It is important to note that states differ in their interpretation of what “solely for the benefit of” means, and it is important to work with an experienced local attorney to make sure the trust qualifies for the exception to the usual Medicaid penalties for transferring assets.http://www.caregiver.com/articles/children/planning_for_special_needs_children_prt3.htm
6/09